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On the 27 November 2018, it was announced that an agreement was reached between Malta and Ireland which ends the Single Malt structures. These were being used through the transfer of the management and control of Irish incorporated entities to Malta. Through a Competent Authority Agreement, Malta and Ireland agreed that the purpose of the Double Taxation Convention (DTC) is to eliminate double taxation and not create the opportunity for double non-taxation. Thus, deeming a company incorporated in Ireland but managed and controlled in Malta to be tax resident only in Malta, does not serve the purposes of the Double Taxation Convention as income was not being brought to charge in neither Malta nor Ireland when the income was not remitted to Malta. Accordingly, such an Irish-incorporated company will be tax resident in Ireland and the relevant payments to it will come within the charge to Irish corporation tax.

The agreement will come into force with effect from taxable periods beginning on or after the expiration of a period of six months from the later of the dates on which the Multilateral Instrument (MLI) enters into force in Ireland and Malta. Malta endorsed its agreement with reservations to the MLI through Subsidiary Legislation 123.183 however, to date, the effective date marking the date when such legislation will come into force is yet to be announced.

The Agreement provides the following:

From the coming into effect of the MLI with respect to the DTC between Ireland and Malta (the “Contracting States” in relation to that DTC), where –

for the purpose of avoiding double taxation, under paragraph 3 of Article 4 of the Ireland-Malta DTC a company would be deemed to be only resident in one of the Contracting States, but

in the circumstances concerned –

there is no double taxation to be avoided, and

it is reasonable to conclude that an opportunity for double non-taxation would otherwise arise,

then any such deeming of the company to be resident only in one of the Contracting States shall not be for the purposes of the Ireland-Malta DTC – as it would serve no such purposes. It would be superfluous to, and redundant for, those purposes.

The Competent Authorities shall notify each other in a timely manner where they become aware of circumstances to which this Competent Authority Agreement refers.

The Maltese Tax Authorities issued guidelines in connection with the income tax, VAT and duty on documents implications arising from transactions or arrangements involving DLT assets.

The following is a list of definitions included in the guidelines:

wdt_ID

Category

Definition

1

Coins

A DLT asset designed solely as a means of payment and used in lieu of fiat currency and serve as an alternative to legal tender

2

Financial Tokens (Security, Asset or Asset backed tokens)

A DLT asset exhibiting qualities that are similar to equities, debentures, units in a CIS, derivatives or Financial Instruments

3

Utility Tokens

A DLT asset whose utility, value or application is restricted solely to the acquisition of a good or service

Taxation

The general income tax principles contained in the Income Tax Act apply to transactions involving DLT assets. The guidelines serve to provide clarifications regarding the income tax treatment of a number of transactions or arrangements involving DLT assets.

The following is a summary of the tax treatment of transactions involving DLT Assets:

wdt_ID

Nature of Payment

Income Tax Treatment

5

Payment made or received in a cryptocurrency

Treated like a payment in any other currency and taxable profits are calculated in the same manner

6

Payment by means of the transfer of a financial or utility token

Treated like any other payment in kind

The following is a summary of the income tax treatment of transactions in coins:

wdt_ID

Transaction

Income Tax Treatment of Realised Profits or Proceeds

6

Business of exchanging coins

Taxable income

7

Sale of coins held as trading stock

Taxable income

8

Mining of cryptocurrencies

Taxable income

9

Coins fall outside scope of Article 5 of the Income Tax Act and therefore they are not considered to give rise to any capital gain for income tax purposes.

The following summarises the tax treatment for the return on financial tokens:

wdt_ID

Return on Financial Tokens

Income Tax Treatment

5

Return equivalent to dividends, interest, premium etc., in a cryptocurrency, other currency or in kind

Taxable income

The following outlines the tax treatment arising from the transfers of financial and utility tokens:

wdt_ID

Type of Transferred Tokens

Transaction

Income Tax Treatment of Realised Profits or Proceeds

6

Financial and utility tokens

Trading nature

Taxable ordinary income

7

Financial tokens that meet the definition of "securities"

Non-trading nature

Capital gains taxable under article 5 of the Income Tax Act

8

Financial tokens that do not meet the definition of "securities"

Non-trading nature

Outside scope of capital gains tax

9

Utility tokens

Non-trading nature

Outside scope of capital gains tax

10

Convertible tokens (not being financial tokens at the time of issue) until they are converted into securities

Non-trading nature

Outside scope of capital gains tax

The distinction between trading income and non-trading income may not always be evident. It may therefore be necessary to refer to the badges of trade to determine whether the income received falls within the definition of trading income or not. Such determination is crucial to assess the tax treatment of transferred tokens.

The following portrays the tax treatment applicable for initial offerings:

wdt_ID

Type of Issued Tokens

Nature of Activities

Tax treatment

5

Financial tokens

Raising Capital

Outside Scope from capital gains tax

6

Utility Token

Entails an obligation of the issuer to perform a service or supply of goods to the seller

Gains or profits realised from the provision of the services or supply of goods represents income

Value Added Tax (VAT)

The general VAT principles applicable to taxable events also apply to transactions or arrangements involving DLT assets. Maltese VAT rules apply only if the place of supply of a transaction or arrangement is deemed to be Malta. Furthermore, the chargeable event would only arise where a supply of service is made for a consideration by a taxable person acting as such and there is a direct link between the consideration payable and the supply made and where there is reciprocal performance between the suppliers and the recipient of the service.

The following is a general overview of the VAT treatment of transactions involving DLT assets:

wdt_ID

Activity

Tax Treatment

1

Coins

Exempt without Credit in terms of para 3(4) of Part Two of the Fifth Schedule to the VAT Act

2

Financial Tokens issued to raise capital

Outside Scope of VAT

3

Financial Tokens issued not for the purpose of raising capital

May be treated as Exempt without credit in terms of para 3(5) of Part Two of the Fifth Schedule to the VAT Act

4

Utility Tokens

Taxable (treated as a voucher in terms of Part Nine of the Fourteenth Schedule to the VAT Act)

5

Transaction fees charged by Digital wallet providers in relation to means of payment

Provision of an electronic facility by exchange platforms of coins or security tokens

Exempt without credit

10

Provision of electronic facility by exchange platforms of utility tokens

Taxable

If a token contains features of both a financial and a utility token (also referred to as a hybrid token), then the VAT treatment depends on the use of such token. A hybrid token used as a utility token then it is to be treated as such, while if in another occasion the same token is used as a coin, then it needs to be treated as such.

When treated as a voucher, the consideration paid for a utility token shall be deemed to be gross of VAT due. Another important issue to determine is when the token is subject to VAT:

wdt_ID

Type of Tokens

Taxable Event

5

Underlying good or service, place of supply and value are known at the time of issue of the token - similar to a Single purpose voucher

Time of issue of token

6

Underlying good or service, place of supply and value are NOT known at the time of issue of the token - similar to a Multi purpose voucher

Time of redemption of token

The guidelines provide clarification as to whether initial offerings are subject to VAT or not:

wdt_ID

Type of Initial Offering

Tax treatment

5

An ICO or token generation event where no specific good or service may be identified

Outside Scope of VAT

6

Initial offering of a token where the token issued gives right to identified goods or services for a specified consideration

Taxable

In case of electronically supplied services rendered to non-taxable persons established in other Member States, the supplier may opt to register and account for VAT through the Mini-One-Stop-Shop system (MOSS) to facilitate the administration for the payment of the VAT within the EU.

Duty on Documents and Transfers Act (DDTA)

The following is a summary of the DDTA implications arising with respect to transactions involving DLT assets:

Type of Transferred Tokens

DDTA Treatment

Tax Treatment

5

Coins

Outside scope

7

Financial tokens which possess the same characteristics of “marketable securities” under the DDTA

Subject to DDTA

8

Financial tokens which do not possess the same characteristics of “marketable securities” under the DDTA

Through Legal Notices 306 and 307 of 2018 the Minister for the Digital Economy has established the 1 November 2018 as the date on which the provisions of the Innovative Technology Arrangements and Services (ITAS) Act and of the Virtual Financial Assets (VFA) Act, respectively, shall be deemed to have come into force.

During the Budget speech for 2019 presented on 22 October 2018, it was announced that Malta, like other EU Member States, will be implementing the EU Directive on Anti-Tax Avoidance, more commonly known as ATAD1.

Although no detailed provisions are available yet, the following is a brief summary of the expected changes which will be introduced with effect from 1 January 2019 as a result of ATAD1.

Interest Limitation

When interest and similar borrowing costs of a company exceed interest receivable, the maximum tax deduction that can be claimed in a tax period in respect of the excess costs will be 30% of EBITDA (that is, earnings before interest, tax, depreciation and amortisation). Unutilised costs may be carried forward (subject to any further limitations that may be applicable under the normal provisions of the Income Tax Act). The new restrictions will not apply in cases where the exceeding borrowing costs do not exceed €3,000,000 (three million Euros).

In line with the EU Directive, the regulations envisage the possibility of this limitation being calculated and applied at group level.

The limitation will not apply to financial undertakings. Nor will it apply to costs on loans used to fund long-term public infrastructure EU projects or loans concluded before 17 June 2016.

Exit Tax

A change of residence of a company, or the movement of its assets or of its business to another territory will be treated as a taxable exit event. In such a case, the company will become subject to tax in the same manner as if it has disposed of its assets. The accrued gains will be calculated by reference to the market value of the asset at the time of the exit. Where the country of the new residence of the taxpayer or of the new location of the assets is another EU Member State, the payment of the tax can be deferred.

No exit tax will be chargeable in the case of a temporary movement of assets that is linked to certain financial transactions as long as the assets are returned within 12 (twelve) months.

Controlled Foreign Company (CFC) Rules

An entity will be considered a CFC where it is subject to more than 50% (fifty per cent) control by a parent company that is tax resident in Malta and its associated enterprises and the tax paid on its profits is less than half the tax that would have been paid had the income been subject to tax in Malta.

The measure will not apply:

To a CFC with accounting profits of no more than €750,000 (seven hundred and fifty thousand Euros), and non-trading income of no more than €75,000 (seventy-five thousand Euros); or

To a CFC whose accounting profits amount to no more than 10% (ten per cent) of its operating costs for the tax period.

The parent company will be entitled to double taxation relief for the tax paid by the CFC on the included income. The regulations should also provide for the avoidance of double taxation that could arise if the CFC subsequently distributes its profits or the parent company disposes of its interest in the CFC.

General Anti-Abuse Rule (GAAR)

The Income Tax Act already contains a general anti-abuse provision (article 51) that empowers the Commissioner for Revenue to ignore tax avoidance schemes. The new regulations will add to this rule by applying the definition of tax avoidance schemes as used in the Directive. The measure will accordingly apply to arrangements which are not genuine, meaning that they are not put into place for valid commercial reasons that reflect economic reality, and which have been put in place with a main purpose of obtaining a tax advantage that defeats the object or purpose of tax law.

EU Dispute Resolution Mechanism (DRM)

The EU Directive on ERM will be implemented by the end of June 2019 and it will be instrumental in providing Maltese taxpayers with access to a new dispute resolution framework in relation to disputes with other EU tax authorities that may come about given the changes that are being implemented in the international tax arena.

EU Mandatory Disclosure Directive (DAC 6)

Regulations for the transposition of DAC 6 are being prepared and will meet the implementation deadlines set out in the Directive but no further details are available yet.

ATAD 2 effective as of 1 January 2020 and 1 January 2022

Apart from ATAD1, Malta will also have to implement the provisions of ATAD2 although these will take place on 1 January 2020 and 1 January 2022.

ATAD 2 will replace the original anti-hybrid provisions of ATAD 1 by extending them to include mismatches involving third countries and expanding the definition of hybrid mismatches to include hybrid permanent establishment mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. It is still premature to make any further comments on ATAD2.

Patent Box Regime

Malta will introduce a new patent box regime that complies with the EU Code of Conduct (Business Taxation) and the OECD proposals on preferential intellectual property regimes (the so-called Modified Nexus approach). Once again, no further details are available at this stage.

Conclusion

ATAD will introduce new concepts into the Maltese tax legislation such as exit taxes and CFC rules. However, the changes should not have a dramatic effect to the tax system especially the principles of the full imputation system and the tax refunds which shareholders may claim upon a distribution of certain taxed profits. We expect no changes to the participation exemption regime and we’ll have to see whether the step-up provisions already contained in our tax legislation will be affected. If not, the step-up provisions and the participation exemption should continue to provide interesting opportunities.

It will be interesting to see how the interest limitation provisions will ‘interact’ with the newly introduced rules on Notional Interest Deduction which had an extremely positive effect on a number of Maltese companies

Very limited amendments are expected for the implementation of GAAR as required by the Directive since it is very similar to that already included in the Maltese Income Tax Act.

On 22 October 2018, the Honourable Minister for Finance, Professor Edward Scicluna, presented the Budget for 2019. The introductory part of the budget speech was dedicated to some features of the Maltese economy, which may be summarised as follows:

GDP increase in real terms – 6.7% in 2017 and an expected increase of 5.3% for 2018;

Unemployment stood at 3.8% in August 2018 and this is expected to be around 4.3% in 2019;

An expected budget surplus of 1.1% for 2018 and 1.3% for 2019;

Inflation rate of 1.9% for 2019;

Government debt as a percentage of GDP expected to be 46.8% at end of 2018 and this should go down to 43.8% in 2019.

The Cost of Living Increase (COLA) for 2019 will amount to €2.33 per week. Social security pensions will be increased by an additional €2.17 per week and therefore the total weekly increase for pensioners will be €4.50.

Tax Incentives and Refunds

An increase in the tax deductibility / tax credit for Third Pillar Pension Plans and Voluntary Occupational Pension Plans.

Parents whose children attend private schools will benefit from an increase in tax credit of €300 per child. The revised tax deductions will be €1,600, €1,900 and €2,600 for each child attending kindergarten, primary school and secondary school respectively.

Employees earning less than €60,000 are entitled to a tax refund ranging between €40 and €68.

Non-Governmental Organisations (NGOs) whose annual income does not exceed €10,000 will be tax exempt.

Increase in the fiscal incentives to the film industry.

An extension to the reduction in the rate of Duty on Documents (Stamp Duty) from the normal 5% to 1.5% upon the transfer of shares and immovable business property from parents to their children.

The reduced VAT rate of 5% on books and other printed matter such as magazines and publications will now be extended to similar material which is made available electronically.

Individuals investing in a domestic Reverse Osmosis will benefit from a VAT refund capped at €70.

The refund capping on wedding expenses will be increased to €2,000.

International Taxation

Amendments to the tax legislation will be introduced on 1 January 2019 to implement Anti-Tax Avoidance Directive 1 (ATAD 1). These changes will introduce new concepts into our tax legislation such as interest deduction limitations, exit taxes and Controlled Foreign Company (CFC) rules. Anti-Tax Avoidance Directive 2 (ATAD 2) will also require new legislative changes, however, these will come into effect on 1 January 2020 and 1 January 2022. The focus of this EU Directive is to address hybrid mismatches.

Malta will be adopting the EU Mandatory Disclosure Directive (DAC 6) in relation to mandatory exchange of information and adoption of the EU Dispute Resolution Mechanism (DRM).

A patent box regime in line with the EU Code of Conduct on Business Taxation and the OECD BEPS standard will be introduced.

New rules will be published in relation to the taxation of the digital economy.

Social Measures

Low income earning families will benefit from an increase in the children’s allowance.

The minimum wage will be raised by €3 per week for employees in their second year of employment and by another €3 per week during their third year of employment.

Unemployment benefits will now be available to self-employed forced to close their business.

The maximum amount of exempt pension income will be raised to €13,434.

A grant of €300 per annum shall be provided to individuals over 75 years of age who continue to reside in their home.

Government Savings Bonds will be issued during the year for individuals over 62 years who wish to invest their savings at favourable interest rates.

Increase in maximum rent subsidy ranging from €3,000 and €5,000 per year will be granted to certain families.

The Government will also be assisting persons over 40 years of age wishing to buy their residence (for which they require financing for not more than 50% of the value of the property purchased) by paying the interest on such loan.

Gozo-related incentives

Gozitan employees employed in the private sector in Malta may apply for a refund of the ferry fare.

Gozitan government employees may also request a partial compensation of €1.50 per day when paying for pooled transportation.

The Government is also incentivising the creation of new jobs in Gozo by extending the partial refund of the wage paid to new employees with a three-year contract. The refund will amount to 30% of wage cost with a capping of €6,000 for every new employee.

Other non-financial measures

An additional day of leave entitlement will be added to the current 25 days of leave available to all full-time employees.

Following the publication of the White Paper to address issues in relation to renting of immovable property for residential purposes, it is now expected that the new law will address the current issues faced by various tenants and landlords alike.

Launching of the Fintech Accelerator by the Malta Stock Exchange with the objective of attracting further business within this sector to Malta.

Further introduction of a legislative framework to attract additional investment in Digital Ledger Technology (DLT) and blockchain in connection to Artificial Intelligence (AI) and Internet of Things (IoT).

The setting up of a new entity, Tech.mt, to promote Malta’s potential within the Blockchain industry and the introduction of a legislative framework in connection with e-sports.

Introduction of a legislative framework to attract and assist foreign start-ups wishing to set up in Malta.

Immovable Property related measures

To incentivise affordable lease arrangements, the Government will introduce a reduction in the capital gains tax upon sale of immovable property if such property is rented out at affordable lease payments for a period of not less than 7 years. No details on such incentive were made available during the budget speech.

Further capital investments were announced for new social housing, the regeneration of government owned property that may be used for social housing and renovation of current social housing estates.

An extension to the reduction or exemption in the rate of Duty on Documents upon the purchase of immovable property for first time buyers, second time buyers, property situated in Urban Conservation Areas (UCA) and property bought in Gozo.

Property owners may also benefit from the extension of the scheme to claim back expenses in connection with restoration works.

Infrastructure and incentives to reduce traffic congestion issues

A further capital expenditure of €100 million on road infrastructure and another €1 million on soft landscaping and other embellishments.

The free public transport scheme for persons between 16 years and 20 years will be extended and full-time students aged 14 years of age and over may now benefit from free public transport.

Various schemes introduced during the last budget are being extended for another year. These include the VAT refund upon the purchase of bicycles and pedelec bicycles, the VAT refund upon purchase of motorbikes and scooters up to a maximum of €400, the grants available to companies and local councils upon the purchase of bicycle racks, the exemption from registration tax upon the purchase of eco-friendly cars and the car scrapping scheme and grant upon conversion of car from petrol to gas.

Conclusion

The Budget does not introduce any new taxes but the Minister’s commitment to implement the EU Anti-Tax Avoidance Directive (ATAD 1) with effect from 1 January 2019 is of interest to Maltese companies owned by non-resident shareholders or involved in cross border transactions since Malta will see the introduction of interest deduction limitations, exit taxes which may also apply on a change of tax residence of a company which is not temporary, and regulations with respect to anti-abuse provisions and the introduction of CFC rules.

During 2019, Malta will also implement the EU Directive on DRM and this should give Maltese taxpayers access to a new framework with respect to disputes involving other EU Member States. Then in the year 2020, Malta will implement the DAC 6 as well as ATAD 2. The provisions of ATAD 2 involving hybrid permanent establishment mismatches, hybrid transfers imported mismatches, reverse hybrid mismatches and dual resident mismatches will be introduced on 1 January 2020 and 1 January 2022 as set out in the directive.

These various measures will be dealt with in a separate newsletter since they may have a wide-ranging effect on foreign owned companies. Although no detailed provisions are yet available, the information will highlight the expected changes particularly the ones coming into effect on 1 January 2019 as a result of ATAD 1.

This week, Taxand published its annual Global Guide to M&A Tax. It provides insight into the tax treatment of global mergers and acquisitions in 33 countries and an introduction to M&A tax planning in each of the diverse fiscal environments in its scope.

The unprecedented M&A cycle in which we find ourselves shows no signs of slowing halfway through 2018. Although global economic strength clearly is providing fuel to this hot deal market, the following key factors are also fanning these flames, encouraging active market participants to continue engaging in M&A and those sitting on the sidelines to abandon their wait-and-see approaches. These are:

United States Tax Reform

Private Equity Dry Powder

Brexit and European Elections

Base Erosion Profit Shifting Initiative (“BEPS”)

Shareholder Activism

The strong global economy and the factors mentioned above should continue to fuel global M&A activity in the short term. Cross-border M&A should continue to expand at a faster pace than purely domestic M&A as developing countries participate to a greater extent than ever in global markets. All indicators point toward a strong 2018 in M&A activity.

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Following the approval by Maltese Parliament of the cryptocurrency related bills on the 4th July 2018, through Legal Notice 250 of 2018 the Minister for the Digital Economy has established the 15th July 2018 as the date on which the provisions of the Malta Digital Innovation Authority (MDIA) Act shall be deemed to have come into force and hence the MDIA is now officially set-up. The Authority shall now commence the process of staff on-boarding and regulatory functions in terms of the MDIA Act.

On 4 July 2018, the Maltese Parliament has unanimously approved a trio of cryptocurrency related bills as follows:

The Malta Digital Innovation Authority Act which shall provide for the establishment of an authority to be known as the Malta Digital Innovation Authority.

The Virtual Financial Assets Act which shall regulate the field of Initial Virtual Financial Asset Offerings, or as more commonly referred to Initial Coin Offerings, Virtual Financial Assets and cryptocurrency currency exchanges whilst outlining the licensing requirements, the application, granting and cancellation of such licenses and provide for other matters ancillary thereto or connected therewith.

The Innovative Technology Arrangements and Services Act which shall mainly provide for the regulation of designated innovative technology arrangements as well as of designated innovative technology services.

Malta is one of the first jurisdictions worldwide having in place specific legislation regulating this technology thus making Malta, an EU Member State, attractive to blockchain based companies and Initial Coin Offering (ICO) issuers. Indeed, Malta has already seen several large cryptocurrency exchanges moving operations whilst the crypto friendly legislation was progressing.

Through the certification of technology arrangements, registration of service providers and regulation of ICOs, Malta will provide legal certainty and integrity to the industry and protection to both companies and investors.

Financial institutions who deduct the final withholding tax (FWT) of 15% on payment of interest and other investment income are now obliged to disclose the recipient’s name, address and the income tax registration number together with the amount of investment income paid and tax paid on such income to the tax authorities. Such information may not be requested by the tax authorities after the lapse of nine years. Such disclosure is to be made by financial institutions with effect from year of assessment 2019.

The FWT of 15% has been extended and now also applies to income from ground rents related to urban and rural tenements.

A tax deduction has been introduced on the exploitation of qualifying intellectual property (such as royalties) based on a percentage of qualifying income. The deduction has been introduced with effect from 29 March 2018 however further details are expected to be issued in this regard to clarify when such deductions made be availed of.

The legislation has been also amended so that it is in line with the guidelines issued by the tax authorities on expenditure of a capital nature on intellectual property or any intellectual property rights. It is now clear that such expenditure may be amortised over a period of at least three years which shall not be less than a minimum period of three consecutive years, the first year being that in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights is / are first used or employed in producing the income. Such change is effective from year of assessment 2017.